Cash Flow Planning for Life - Helping you reach your personal & professional financial goals.

Cash Flow Planning for Life

Helping you reach your personal & professional financial goals.

#4 – IRS Form 982 – Insolvency

Posted by Mark On March 17th

IRS Form 982 - Insolvency

This is the fourth tip in our series 7 Things You Should Know About the Tax Consequences of Debt Forgiveness which is also available as a free eBook from your Naples Accounting Firm.

IRS Form 982 generally says that “the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income.” The specific instructions are contained in section 108 of the Internal Revenue Code.

One of the “circumstances” they are referring to here is “insolvency”. The basic definition of insolvency is the inability to pay one’s debts as they fall due. When referring to a business, insolvency refers to the inability of a company to pay off its debts.

In this instance, we are referring to the “Insolvent Taxpayer”: An insolvent taxpayer is defined as anyone with total liabilities (debts) that exceed the fair market value of all assets. This determination is made immediately before the discharge of indebtedness. As mentioned above, insolvency is a mandatory exception under the Internal Revenue Code (section 108(a). It should be looked at first in any discharge of indebtedness.

Making this determination is complex, so it would be ill advised to depend on your tax return program. In this instance, I highly recommend you employ the help of a tax professional. If the forgiven debt can be excluded under IRC 108 then IRS Form 982 will need to be attached to your tax return (Form 1040) for the year debt was forgiven.

If you are not deemed insolvent, additional exclusions do exist for qualified principle residences. Again, it is important to seek a tax professional to outline the exclusions that may apply to you.

IRS Form 982 can be found here: www.irs.gov/pub/irs-pdf/f982.pdf7 Things You Should Know About the Tax Consequences of Debt Forgiveness

If you have further questions about insolvency and how it can affect your income taxes, please contact us online, call (239) 384-9688, or download our FREE eBook 7 Things You Should Know About the Tax Consequences of Debt Forgiveness. When it’s time for us to meet, here is a good way for you to prepare before meeting with your tax planner.

-Mark

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This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this post is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

1 Response

  1. #5 – Filing 1099 IRS Forms That Deal With Mortgage Debt, Part 1 | Cash Flow Planning for Life Says:

    […] all forgiven mortgage debt to the IRS. However, if you fall under one of the exceptions, such as “Insolvency”, then you do not need to pay taxes on […]

    Posted on March 24th, 2011 at 11:04 am

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